Zakat on REITs

Real Estate Investment Trusts explained

To understand Zakat on REITs properly, you must first understand what REITs fundamentally are. A Real Estate Investment Trust is a company that owns, operates, or finances income-producing real estate properties. REITs were created by legislation in the United States in 1960 and have since spread globally including to the UK, Singapore, Malaysia, and many other countries. The REIT structure allows individual investors to own shares in large commercial real estate portfolios that would otherwise require millions of pounds to access directly.

REITs must meet specific legal requirements. They must distribute at least 90% of taxable income to shareholders as dividends, which is why REITs typically pay higher dividends than regular stocks. They must invest at least 75% of assets in real estate. They must derive at least 75% of gross income from real estate related sources like rents or mortgage interest. They must have at least 100 shareholders to ensure broad ownership. These requirements create the REIT structure that Muslim investors encounter when calculating Zakat on REITs.

Why REITs are treated like stocks for Zakat

For Zakat on REITs purposes, REIT shares are treated similarly to regular stock shares because they represent ownership interests in companies traded on public exchanges. Islamic scholars classify zakatable assets into categories, and publicly traded equity securities fall into the category of trade goods or investment assets. When you own REIT shares, you possess wealth in the form of marketable securities that can be converted to cash by selling on the exchange. This makes them zakatable regardless of whether you intend to hold long term or trade actively.

The Zakat calculation method follows the same principles as other stocks. You check the current market value of your REIT holdings on your annual Zakat date by multiplying your number of shares by the current market price per share. This total value is included in your overall wealth assessment. If your total wealth including REIT shares exceeds nisab and has been above nisab for a complete lunar year, you calculate Zakat at 2.5% on the total. The underlying asset being real estate rather than other business assets does not change this fundamental calculation method. Learn more about stock Zakat in our Zakat on Stocks guide.

Equity REITs are generally permissible

Equity REITs own and operate income-producing real estate properties. These REITs purchase buildings, manage them, lease space to tenants, collect rental income, handle property maintenance and improvements, and distribute net rental profits to shareholders. The business model is straightforward property ownership and rental operations. From an Islamic perspective, owning property and renting it to tenants for halal purposes is completely permissible business activity that has been practiced since the time of the Prophet Muhammad (peace be upon him).

Equity REITs invest in various property types. Residential REITs own apartment buildings and rental housing. Office REITs own commercial office buildings leased to businesses. Retail REITs own shopping centers and malls. Industrial REITs own warehouses and distribution centers. Healthcare REITs own hospitals, medical offices, and senior living facilities. Data center REITs own facilities housing computer servers. Self-storage REITs own storage unit facilities. Each type can be halal if the properties house permissible activities and the REIT avoids excessive debt financing. For Zakat on REITs, equity REITs meeting Shariah criteria require standard Zakat calculation on market value.

Mortgage REITs are completely haram

Mortgage REITs have a fundamentally different business model that is prohibited in Islam. Instead of owning properties, mortgage REITs invest in mortgage loans and mortgage-backed securities. They lend money to property buyers or purchase existing mortgages from banks, earning income from the interest payments borrowers make on these loans. This is pure interest-based lending which is riba explicitly forbidden in the Quran. The fact that mortgages are secured by real estate does not change the haram nature of earning predetermined interest on loans.

Mortgage REITs often use significant leverage themselves, borrowing money at lower short-term interest rates and lending it out at higher long-term mortgage rates, profiting from the spread. This creates a layered riba structure where the REIT both pays and receives interest. Major mortgage REITs include companies like Annaly Capital Management, AGNC Investment, and others that Muslims must completely avoid. If you discover you own mortgage REIT shares, sell them immediately, calculate Zakat on the principal value recovered, and dispose of any dividends received from mortgage interest to charity. These dividends are haram income that cannot be kept. Mortgage REITs have no place in calculating legitimate Zakat on REITs for Muslim investors.

Hybrid REITs require individual screening

Some REITs combine equity and mortgage operations, owning some properties while also investing in mortgages or providing property financing. These hybrid REITs require careful screening for Zakat on REITs purposes. If the mortgage or lending portion is minor, some scholars may accept the REIT with the caveat that you must purge the proportion of income derived from interest. If the mortgage portion is substantial, the REIT should be avoided entirely as the riba component is too significant.

The general principle in Islamic finance is that a business must derive the overwhelming majority of revenue from halal sources. If a REIT earns 95% of income from property rentals and 5% from incidental mortgage investments, you might invest but must calculate and dispose of 5% of dividends to charity. If a REIT earns 30% from mortgages, the riba contamination is too great and the investment should be rejected. Most Islamic scholars recommend sticking to pure equity REITs to avoid these complications and ensure clear Zakat on REITs calculation without interest purification issues.

Business activity screening for REIT properties

The first screening criterion for Zakat on REITs is ensuring the properties house halal business activities. A REIT owning apartment buildings for residential housing is clearly permissible as providing shelter is essential and virtuous. A REIT owning office buildings leased to general businesses like technology companies, consulting firms, or manufacturers is permissible. Industrial REITs owning warehouses for Amazon, logistics companies, or manufacturers are generally acceptable as they facilitate legitimate commerce.

However, some REITs own properties housing prohibited activities. Gaming and leisure REITs may own casinos, which are haram gambling operations. Hospitality REITs might own hotels with bars and nightclubs serving alcohol. Retail REITs could own shopping centers with major tenants being liquor stores or bars. If a REIT derives significant rental income from properties housing gambling, alcohol sales, interest-based banking, or other prohibited activities, Muslim investors should avoid that REIT entirely. The rental income from haram tenant operations makes the REIT earnings impure.

Debt and leverage screening for REITs

The second major screening criterion is REIT debt levels. Real estate companies typically use leverage to acquire properties, borrowing money to finance purchases alongside equity capital. From an Islamic perspective, excessive debt creates problems. The company pays interest on borrowed money, which is riba. High leverage ratios mean the company is heavily dependent on interest-based financing rather than genuine equity ownership. Islamic finance scholars have developed screening ratios to determine acceptable debt limits.

The commonly applied rule is that total debt should not exceed one-third of total assets. This one-third threshold comes from Islamic jurisprudence principles about acceptable limits of haram elements in otherwise permissible businesses. For Zakat on REITs, check the REIT financial statements for total liabilities and total assets. Calculate the debt-to-asset ratio. If total debt is thirty percent or less of total assets, most scholars accept the REIT as permissible despite the interest-based borrowing being a minority component. If debt exceeds thirty-three percent, the REIT is too leveraged and should be avoided.

However, some Islamic scholars are more lenient with real estate companies given industry norms where leverage is standard practice. They might accept debt levels up to fifty percent of assets for property companies while maintaining the one-third rule for other industries. The stricter position requiring debt under one-third is safer for Muslims wanting clear Shariah compliance. Examine individual REIT balance sheets to determine debt ratios before investing and calculating Zakat on REITs.

Income source screening for REIT revenue

The third screening factor is analyzing where REIT income comes from. Pure equity REITs should derive the overwhelming majority of revenue from rental income collected from tenants occupying their properties. This rental income is halal business earnings from providing beneficial property use. Check the REIT income statement to verify that rental revenue comprises at least ninety-five percent of total income, which indicates a clean business model focused on property operations.

Some REITs may have minor income from interest earned on cash deposits held temporarily between property transactions. If this interest income is incidental and comprises less than five percent of total revenue, most scholars permit the REIT with the requirement that you calculate and dispose of the proportional interest component of dividends you receive. For example, if you receive one thousand pounds in REIT dividends and three percent of REIT revenue came from interest, dispose of thirty pounds to charity and keep the remaining nine hundred and seventy pounds as halal income. For Zakat on REITs calculation, this purification process ensures only halal wealth is counted.

Use current market value for REIT Zakat calculation

When calculating Zakat on REITs, you must determine the current market value of your REIT shares on your annual Zakat date. REIT shares trade on stock exchanges with prices fluctuating based on property values, rental income performance, interest rate changes, and market sentiment. On your designated Zakat date according to the Islamic lunar calendar, check the closing market price of each REIT you own. Multiply the price per share by your total number of shares to get the current market value of each holding.

For example, you own five hundred shares of a residential REIT trading at eighteen pounds per share on your Zakat date. The market value calculation is five hundred times eighteen equals nine thousand pounds. This nine thousand pounds is the zakatable value for this REIT holding. Repeat this calculation for each different REIT you own, then sum all REIT market values together to get your total REIT wealth. This total is then combined with cash, other stocks, gold, and all other zakatable assets to determine your complete wealth for Zakat on REITs and other assets.

Handling REIT dividends and distributions for Zakat

REITs distribute quarterly dividends to shareholders representing rental income collected from properties minus operating expenses. These dividend payments arrive in your brokerage account as cash throughout the year. For Zakat on REITs and dividends, understand that the cash from dividends is zakatable separately from the share value itself. You are not paying Zakat twice on the same wealth, rather you are accounting for different forms of wealth at the proper time.

The REIT share value already reflects the company's assets and expected future income. When dividends are paid out, the share price typically drops by approximately the dividend amount on the ex-dividend date because cash has left the company. The cash then enters your possession. On your annual Zakat date, you count the current market value of the shares plus any cash from dividends that has accumulated in your account. For example, your REIT shares are worth twenty thousand pounds on your Zakat date, and you have three thousand pounds cash from dividend distributions received during the year sitting in your brokerage account. Your total zakatable wealth from this REIT investment is twenty-three thousand pounds.

Annual Zakat rate of 2.5% on total REIT value

After determining your total REIT market value plus accumulated dividend cash, combine this with all other zakatable wealth including other stocks, mutual funds, cash in bank accounts, physical gold, cryptocurrency, and any other assets you own. Compare the total to nisab threshold which is the equivalent of 87.48 grams of gold or 612.36 grams of silver in your currency. If your total wealth exceeds nisab and has remained above nisab for one complete lunar year, calculate Zakat at 2.5% on the entire total including REIT holdings.

For example, your complete wealth calculation shows forty-five thousand pounds total including twenty thousand pounds in REIT shares, three thousand pounds REIT dividend cash, twelve thousand pounds in other stocks, eight thousand pounds in bank accounts, and two thousand pounds in gold. Nisab is approximately four hundred pounds based on silver. Your wealth far exceeds nisab. Zakat due is forty-five thousand pounds times 0.025 equals one thousand one hundred and twenty-five pounds. This Zakat covers all your wealth including Zakat on REITs calculated at the standard rate. Our Zakat calculator guides you through this complete process.

UK REITs and their Shariah compliance screening

The UK REIT regime was introduced in 2007 allowing British property companies to operate as REITs with favorable tax treatment. Major UK REITs include Land Securities owning London office and retail properties, British Land with mixed commercial portfolio, Segro specializing in industrial warehouses and logistics, Unite Group focusing on student accommodation, and Legal and General REIT with diversified property holdings. For Zakat on REITs, UK REITs must be screened individually for permissibility like any other REIT.

UK retail REITs require particular attention because many shopping centers and retail parks have tenants selling alcohol or operating gambling facilities. Hammerson and Intu Properties own major shopping centers where alcohol retailers may be significant tenants. Investigate tenant composition before investing. UK industrial and logistics REITs like Segro or Tritax Big Box are generally safer as warehouses typically house permissible commerce. Student accommodation REITs like Unite are usually acceptable as they provide housing. UK office REITs need verification that office tenants are not predominantly banks or financial services firms engaged in interest-based lending.

US REITs and American market considerations

The United States has the largest and most developed REIT market globally with hundreds of publicly traded REITs across all property sectors. Major US residential REITs include Equity Residential, AvalonBay Communities, and UDR owning apartment complexes across American cities. Industrial REITs like Prologis and Duke Realty own massive warehouse portfolios. Office REITs include Boston Properties and SL Green. Healthcare REITs like Welltower and Ventas own medical facilities. Each requires individual screening for Zakat on REITs purposes.

US gaming and leisure REITs like MGM Growth Properties and VICI Properties own casino properties and are completely haram due to gambling operations. Avoid these entirely. US retail REITs like Simon Property Group and Realty Income need examination of tenant mix to ensure minimal alcohol and prohibited business exposure. US self-storage REITs like Public Storage and Extra Space Storage are generally permissible as storage units facilitate legitimate needs. US data center REITs like Equinix and Digital Realty are acceptable as they provide essential technology infrastructure. Geography does not determine REIT permissibility, the business model and compliance with Shariah screening criteria determine halal status for Zakat on REITs.